Rising interest rates could further test the stock market in the coming week

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Traders on the floor of the New York Stock Exchange

Source: The New York Stock Exchange

The tug-of-war between stocks and rising bond yields could set the tone for the week ahead, especially if positive economic data pushes government bond yields higher.

Friday in February’s employment report is the high point of the week’s data and an important cutting-edge look at the impact of the virus on the economy after just 49,000 new jobs were created in January. For February, economists expect 218,000 additional jobs, and the unemployment rate should remain at 6.3%, according to the Dow Jones.

Fed spokesmen are also a major focus of the markets after the rapid rise in bond yields last week felt like a runaway train. Fed Chairman Jerome Powell will be the keynote speaker when he appears at a Wall Street Journal summit Thursday.

“If he wants to stop this rate hike, he has to say something. But he risks sounding hawkish. The more cautious he sounds, the higher the interest rates,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. When the Fed is labeled as reluctant, it means that it is maintaining a simple policy, such as keeping interest rates low.

Some Fed watchers doubt the central bank will comment on the rise in yields any more than Powell said last week when he said the move was the result of a consolidating economy. But bond professionals say Powell could reiterate that Fed policy will remain simple going forward.

The rapid rise in interest rates this month surprised investors. The 10-year benchmark return that affects mortgages and other credit was 1.46% on Friday afternoon, which is roughly 15 basis points [0.15%] it was above the level just a week earlier. After a sharp rise on Thursday, the 10-year yield was trading at 1.50% on both sides. This is the consensus view of where returns would be at the end of the year rather than the beginning.

The rapid rise in yields, which rise when prices fall, startled equity investors last week, which resulted in troubled trading and a large sell-off on Thursday. The Nasdaq fell nearly 4.9% for the week as technology stocks were the hardest hit, while the S&P 500 fell about 2.4% for the week.

“I think it’s likely going to be a short-term tug of war,” said Sam Stovall, CFRA’s chief investment strategist. Stocks were bullish on the economy and now bonds are joining in.

“People forget the reason why we expect a very high increase over last year [economic] Indicators. It is as if we have just stepped into the depths of the recession … and we are now in many measures to get back above pre-pandemic levels, “he said.

Stocks did poorly on average in February, but they were higher this year, boosted by an improving economy, the introduction of vaccines, and the prospect of a big stimulus package. The Biden government’s $ 1.9 trillion stimulus package should go to a vote in the Senate next week.

The expected economic upswing through incentives has also boosted returns and heightened concerns about inflation.

“March is actually a pretty good month for the market. It’s fourth best in terms of average price change. It’s fourth best in terms of frequency of advancement but fourth lowest in terms of volatility,” said Stovall.

The average increase in March since World War II was 1.1%. Over the 14 years that stocks were lower in January and higher in February, the S&P rose an average of 1.9% in March.

In February the S&P gained 2.6% while the Nasdaq lagged 0.9%. The Dow rose 3.2% and the Russell 2000 rose 6.1%.

Stovall, who expected the market to sell off, said technology and consumer staples were among the worst in the past week when stocks were sold, but they were also up the most. Those sectors would likely be more sold if they pulled out further.

“It could be a sale driven by a rotation of expensive technology stocks into smaller and less market-driving value issues,” he said.

Jim Caron, head of global macro strategy at Morgan Stanley Investment Management, said one problem for the market is that the rate change surprised investors. “It was really the speed at which it happened that worried everyone,” he said, noting that last week’s move was notable for the fact that it also included securities with shorter maturities like the 5-year Note acted.

“Basically, the market tested the Fed’s determination to keep rates low for a long time,” said Caron. “They need to make sure that the markets understand that they are seriously on this course for a full and robust recovery, but they also don’t want to be so reluctant that we suddenly price in all kinds of inflation expectations … and prices just climb on it. “

“They want rates to rise for good reason,” he said

Other data for the coming week is ISM manufacturing data for jobless claims on Monday and Thursday, which is important after an unexpected drop in last week’s data.

The profit season is coming to an end, but retailers will be reporting, with Target, Kohl’s and Nordstrom on Tuesday and Costco and BJ’s Warehouse on Thursday.

The annual CERAWeek energy conference lasts all week and includes presentations from industry representatives from Saudi Aramco, Chevron, ConocoPhillips, Total and other countries. The conference has been a pillar of the oil industry for more than three decades.

Calendar for the week ahead

Monday

Merits: Zoom video, MBIA, Ambac Financial, Hilton Grand Vacations, Inovio Pharma, Perrigo, Boingo Wireless, Tegna

9:00 a.m. John Williams, President of the New York Fed

9:05 a.m. Fed Governor Lael Brainard

9:45 am Manufacturing PMI

10:00 am ISM production

10:00 a.m. construction costs

2:00 p.m. Raphael Bostic, Atlanta Fed President

Tuesday

Vehicle sales

Merits: Target, Box, Hewlett Packard Enterprise, Nordstrom, Ross Stores, International Game Technologies, AutoZone Kohls, Abercrombie and Fitch, Hovnanian

1:00 p.m. Fed Governor Lael Brainard

2:00 p.m. Mary Daly, San Francisco Fed President

Wednesday

Merits: Wendys, Dollar Tree, Brown-Forman, Vivendi, Splunk, Marvell Tech, Snowflake, Vroom, American Eagle Outfitters

8:15 am ADP employment

9:45 a.m. Services PMI

10:00 a.m. Philadelphia Fed President Patrick Harker

10:00 am ISM services

12:00 pm Raphael Bostic, Atlanta Fed President

1:00 p.m. Charles Evans, President of the Chicago Fed

2.00 p.m. Beige book

Thursday

Merits: Broadcom, Costco, BJs Wholesale, Gap, Burlington Stores, Ciena, Michaels Cos, IMAX, Kroger, Cooper Cos

8:30 am Initial jobless claims

8:30 a.m. Productivity and Costs

10:00 a.m. factory orders

12:05 p.m. Fed Chairman Jerome Powell

Friday

Merits: Large quantities

8:30 a.m. employment

8:30 a.m. international trade

3 p.m. consumer credit

3:00 p.m. Bostic from Atlanta Fed